Multifamily properties have long held a favored position in commercial real estate, thanks in large part to their ability to outperform in times of economic dislocation. However, the rapid rise in interest rates and a wide buyer-seller gap on pricing has derailed multifamily investment activity. At the end of 2022, multifamily investment fell 70%, and this year, multifamily acquisitions are expected to drop another 15%.
According to Finley Askin, VP at Matthews Real Estate Investment Services, pricing is the primary problem. Sellers have not adjusted to the higher interest rate environment, and buyers are challenged to make deals pencil. But, it isn’t for a lack of demand. When the numbers do work, investors are quickly moving forward on opportunities.
Buyer-Seller Gap Is Steadfast
Askin says that a combination of interest rate increases and market unpredictability are driving a wedge between buyers and sellers on pricing. While buyers quickly adjusted to the new market dynamics, sellers are holding onto hope that pricing will stabilize or rebound. “We really haven’t seen sellers adjust,” says Askin. “They still want the price of 12 months ago, but interest rates have doubled. That has resulted in a decrease in acquisition activity.”
It is mostly sentiment driving owner holdouts, rather than real market data. “As a seller, this is a tough pill to swallow. They may have missed the market,” says Askin. With owners hesitant to adjust, buyers don’t have much opportunity to move forward on deals. In addition, the recent bank collapse has given investors another reason to pause. “The banks collapsing is just not good for perception and it provides more uncertainty,” adds Askin.
Investors Are Ready
Although it is difficult to make multifamily deals pencil, investors are still fervently trying. According to Askin, no one has pulled out of the market or stepped to the sidelines. “All of the buyers I work with want deals and are actively looking at deals,” says Askin. “In most cases, the numbers just aren’t working.”
There are some motivating factors to encourage owners to sell. Assets with distress, mixed ownership or assumable debt offer multifamily investors the best opportunity to secure a deal in today’s market. Askin says that deals with assumable debt have become particularly popular in the last three months.
But caveats apply. The deal has to have an attractive loan-to-value and, of course, a low interest rate. Often, those characteristics are true of many deals purchased within the last three-to-four years, and it has become a popular way to subvert the buyer-seller gap.
Multifamily remains an attractive asset class with strong long-term fundamentals. While the market takes time to adapt to the new interest rate environment, Matthews’ Askin has one piece of advice: “Trust your numbers, and there will be opportunities.”
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